Just watched a really interesting documentary on the Flash Crash of 2010 :

Money & Speed: Inside the Black Box

Some stand-out points :
> CFTC / SEC attribute the root cause as Waddell & Reed ‘dumping’ $4.1bn shares
> Eric Hunsader @ Nanex looks at the W&R trades [ see video at 34m18s ]
> W&R trades don’t look like dumping, they maximize sell price during local up runs
> there are other trades that do look like aggressive dumping, ie. rapid sequential bursts down

The Nanex explanation of the Flash Crash : FlashCrashAnalysis

Price manipulation ?

This raises an interesting Question :

Is it possible for a black box algorithm to use a rational probabilistic strategy to drive down stock price in bursts like this, in order to later buy the stock at a very low artificially deflated price ?  You’d need a lot of stock to do this : is there a threshold of stock volume, say 5% of all stock, under which its impossible to create this effect ?

Price Delay Arbitrage ?

Another aspect of this, is the possibility to do ‘Diffusion Arbitrage’ for want of a better name :

If you can drive the market so quickly that derived instruments take seconds to reprice ( due to the storm of new data), then you have that window to trade ahead of the market in options or indexes based on the underlying you have manipulated.

In this case the delay was a whopping 5 to 35 seconds : see for example Nanex’s FlashCrashSummary , showing the delayed drop and recovery of the Dow.